Arcadia Biosciences, Inc.

Good afternoon and welcome to Arcadia Biosciences' third quarter 2021 earnings conference call. Today's presenters will be Matt Flavan, President and CEO, and Pom Haley, Chief Financial Officer of Arcadia. This call is being webcast and you can refer to the company's press release at arcadiabio.com. Before we start, we would like to remind you that Arcadia Biosciences will be making forward-looking statements on this call. based on current expectations and currently available information. However, since these statements are based on factors that involves risk and uncertainties, the company's actual performance and results may differ materially from those described or implied today. You can review the company's safe harbor language in their most recently filed 10-Q. With that, I'll now turn the call over to Matt Flavin, President and CEO.

Thank you, Delphin. Hello, everyone, and welcome to our third quarter conference call. Thank you for joining us. I'll begin by saying that the third quarter has been marked by a heightened intensity of focus, building on the themes of capacity building, integration, and alignment that we discussed back in August. It has also been marked by strong financial results, a further validation of our successful transformation into a consumer products company. Our third quarter showed continued sequential growth during the year, with revenues up six-fold over prior year same quarter, and year-to-date we are up four-fold over the prior year to date. In addition, revenues are increasing sequentially during the year as well, with revenues up 70% Q2 over Q1 and 69% Q3 over Q2. To help ensure the positive momentum continues, we've been persistent, with our expanded bench of CPG talent in place in honing our focus, further refining our go-to-market strategies for 2022, and identifying ways to accelerate our path forward. To that end, the company has also made decisions regarding leadership. As we announced in September, I will be stepping down as CEO when a successor is identified. After planting the flag as a CPG company, we've made substantial progress in establishing a portfolio of plant-based, better-for-you food and wellness products. And we've done it in a remarkably short period of time. I'm very pleased with the brand platform that's now in place and primed to penetrate the market. At this point, having accomplished a lot of the foundational heavy lifting, the timing makes sense to begin the process of transitioning to a new leader, someone with deep experience running successful CPG organizations who will be able to build on our progress accelerate speed to market, and capitalize on the tremendous growth opportunities ahead. Our board has launched a national search, and that process remains underway. We are being deliberate in our approach and understand that finding the right person for the position is more important than adhering to a specific time frame, though we are making solid progress and continue to expect process to be completed by the end of the year. In the meantime, our company is keeping pace and moving forward with its plans, and I am concentrating on ensuring that the next leader will be able to hit the ground running when the baton is passed. That includes making critical decisions about where it makes sense to continue to invest resources for the long haul. But first, I'd like to provide updates on our product sales, the launch of our e-commerce business, and the multi-channel rollout of Good Wheat. Beginning with our body care products, we significantly expanded our distribution as compared to the prior year third quarter, which we believe bodes well for continued retail growth. We estimate the distribution for our three body care brands expanded by nearly 80% compared to the prior year, primarily driven by the launch of ProVault in Q1 2021. However, our body care product revenues for the quarter were actually down 42% year-over-year compared for the following two reasons. One, the global shipping crisis resulted in an approximately 300,000 in orders that were received but not fulfilled in Q3 and will shift into Q4. And two, in the prior year, as a result of the COVID pandemic, 470,000 in sanitizer revenues were recognized, which were temporary in nature. Excluding the impact of these two anomalies, our body care product orders actually increased 20%, year-over-year third quarter. Also, our Zola coconut water revenue was up 34%, and our GLA Sanova Saffol oil revenue was up 137% over the third quarter of last year. The increase in coconut water sales is due to category growth and strong brand performance, and our GLA sales are up due to higher pet food sales due to an expanded U.S. presence of our Canadian distributor, Royal Canin. Although revenues for these products were generally up, our revenue growth and gross margins are definitely being negatively impacted by the global shipping crisis, as well as the inflationary pressures affecting the U.S. economy. These dynamics have increased our costs in three primary ways. One, we've experienced a threefold increase in the cost of inbound international shipping, which has increased our product costs for Zola by more than 25%. Two, the arrival of our manufacturing automation equipment was delayed by 90 days, seriously compromising our planned automation efficiencies for the quarter. And three, we've experienced increased ingredient and material costs for a number of body care products, up to 100% in some instances. These three factors have temporarily driven gross margins for our body care products into single-digit territory. However, we've implemented discrete action plans to alleviate these pressures. With regard to the impact of inflation, we are evaluating our price elasticity by product to determine if there are opportunities to raise our prices without negatively affecting our sell-through volumes. Also, where possible, we are shifting from international suppliers to domestic suppliers where we have better supply assurance. And as of a few weeks ago, we've received all of our automation equipment on site and and expect to complete implementation of our automation in due course. We expect these initiatives will have a material impact on improving our margins, but we also recognize that shipping costs and inflation are expected to persist into the foreseeable future and may worsen before they get better. So this will continue to be an area of critical focus. Shifting for a moment to our operating milestone achievements during the quarter, let me begin with our e-commerce initiatives. A primary focus during the quarter has been the build-out of our new body care e-commerce sites to begin driving online sales through robust performance marketing. As I mentioned previously, historically, our retail product sales are roughly 90% brick and mortar, and with little investment to date in promoting our products online, we believe e-commerce sales to be an untapped source of new revenue. That being the case, I'm pleased to say that as of October 29th, we've launched our new ProVault site at getprovault.com, and we recently began our digital marketing and advertising campaign. We're in the early phase of testing our performance marketing strategies, honing and refining them to maximize traffic to the site and conversion of impressions to purchases. Also, we remain on track to have the remaining two product sites launched by the end of the year, including the rebranded Savvy e-commerce website, SavvyNaturals.com, with all new product, packaging, and design, and the optimized Soul Spring commerce site, which is MySoulSpring.com. As for our Good Week Pasta launch, we are tracking for a full-scale launch of five pasta SKUs in Q1 of 2022, including a full-scale performance marketing push. This is a slight modification to our prior expectation for a soft launch in December and then a full-scale launch in January. The shipping crisis has also affected the readiness of our contract manufacturer to provide packaging and products as of January. Therefore, we're broadening the estimated launch timing to Q1 this to account for these expected delays. Next, I'd like to share a little about our progress to date in preparing our Good Wheat Pasta products for entrée into the consumer retail channel. Our team has invested meaningful resources to ensure we have a consumer preferred package for our Good Wheat Pasta. We tested several variations to identify the most impactful design. The package we will launch has strong purchase intent and in fact outscores category norms for purchase intent as well as uniqueness. Our selected design also breaks through on shelf and will translate well across categories as we expand the brand in the future. A final milestone highlight for the quarter is our successful harvest of over 20,000 pounds of Hawaiian hemp biomass. We are currently processing the biomass and expect the resulting output to be be one of the largest supplies of Hawaiian CBD on the market today. In cooperation with our Archipelago joint venture partner, we will continue to evaluate the optimal monetization strategy for this asset. Turning now to a look forward, I'll say a word about our goals for the balance of 2021 and early 2022. As we reflect on the market interest for our consumer products, one thing is clear. The channels to market and the number of product category opportunities are numerous, and collectively they exceed our resource bandwidth to pursue all of them at once. Therefore, focused execution on select opportunities remains critical to our continued success. Especially over the next 24 months, we are carefully staging our resources to conserve cash while focusing on the following key initiatives that we believe build the foundation for sustained growth. First, launch and scale up of our body care products online. Second, expand our body care brick and mortar retail business by focusing on innovation within our existing brands to drive organic growth as well as continuing to add new doors. And third, introduce our good wheat pasta online and in retail stores drive sales, and earn meaningful brand recognition in 2022. We believe successful execution of these three initiatives will drive encouraging near-term revenue growth, meaningfully build our brands, and position us favorably to enter new channels and product categories in due course. We're also putting in place measures to reduce our forward operating expense run rate. For instance, now that we've produced a sufficient ingredient supply of our Hawaiian CBD and we are winding down our cultivation activities. The same is true for our good hemp seed cultivation. We've wound down production operations since the hemp seed market is saturated. With that, I'll turn the call over to Pam for an update on our financials. Pam?

Thank you, Matt. I'd like to take a few moments to share the financial highlights for the recent quarter and year-to-date with you now. As Matt mentioned at the onset of the call, we are pleased with the revenue performance of the brands acquired last quarter, Q2. Total revenues recognized for third quarter 2021 were $2.4 million compared to $314,000 in third quarter 2020, with a majority of the $2.1 million increase driven by the acquisition of the portfolio of body care products and Zola coconut water, in addition to higher GLA sales this quarter. The year-to-date increase in revenues of $3.7 million were mostly attributable to the acquired brands as well, as they generated $2.6 million of revenue in addition to good hemp seeds, good wheat grain, and increased GLA sales this year to date. Total operating expenses of $11.1 million in Q3 2021 were $3.2 million higher than the $7.9 million recognized in Q3 2020, and total operating expenses of $26.3 million Q3 2021 year to date were $5.2 million higher than the $21.1 million recognized Q3 2020 year-to-date. Cost of product revenues were $2.5 million in Q3 2021 versus $1.8 million in Q3 2020 and $5 million in Q3 2021 year-to-date versus $3.5 million in Q3 2020 year-to-date. The $670,000 year-over-year increase for the quarter was primarily driven by the product sales of the portfolio of newly acquired brands, partially offset by lower inventory write-downs this year versus last. Write-downs charged to COGS totaled $449,000 in the third quarter 2021 for the adjustment to fair market value of the commodity hemp seeds in inventory and the destruction of hemp crops due to disease, with $1.5 million of write-downs in third quarter 2020. As for year-to-date, the $1.5 million increase in COGS over the same period in the prior year was driven by the same factors. R&D expenses for the quarter were $1 million in 2021 as compared to $1.8 million in third quarter 2020 and $3.3 million third quarter year-to-date compared to $6 million third quarter 2020 year-to-date. The decrease for both periods was driven primarily by lower employee-related expenses and as we've restructured our research teams to move from true research and discovery work to the development and commercialization phase of our consumer products. In addition, we no longer have the vertica-related expenses in 2021 that were present in 2020, with the sale of our share of the joint venture in November of last year. Partially upsetting the favorability for the quarter and year-to-date in 2021 is an expense of $333,000 recognized for the release of product from inventory that was not commercialized by Arcadia. A write-down for the impairment of fixed assets in the amount of 1.1 million was recorded in third quarter of 2021 and is associated with the agricultural and extraction equipment within our archipelago joint venture. As Matt noted, we have successfully harvested over 20,000 pounds of hemp biomass that is en route to be processed into CBD oil. We have produced a sufficient quantity of biomass and are not able to extract CBD oil in Hawaii in the near future due to regulatory restrictions still in place. As a result of these regulatory challenges and of unfavorable hemp CBD market conditions, we have assessed the archipelago assets for impairment and recorded the write-down. Selling general and administrative expenses totaled $6.3 million in the third quarter of 2021, a $2 million increase from the $4.3 million recognized in third quarter 2020. Third quarter year to date, 2021, SG&A expenses totaled $16.8 million, a $5.1 million increase from the $11.7 million recognized third quarter year to date for 2020. The increase for both periods is attributed primarily to the additional salaries and benefits associated with the increased headcount. Marketing, advertising, and consulting activities increased during 2021 as expected in preparation for product launches. Net loss attributable to common stockholders was $2.2 million in the third quarter of 2021 compared to $6.4 million in the third quarter of 2020 and $5.4 million in the first nine months of 2021 compared to $13.6 million in the first nine months of 2020. The operating activity has been addressed, so I'll give a little more detail on the other components. The third quarter of 2021 included a non-cash credit to expense of $4.8 million for the change in the fair value of warrant liabilities from the end of Q2 to the end of Q3 2021, while Q3 of 2020 included a $1.1 million credit for the change. Specific to this current quarter is a gain recognized on the extinguishment of the $1.1 million Paycheck Protection Program loan that was funded last year as we received notification of forgiveness. Third quarter of 2020 included a $682,000 loss on the extinguishment of warrant liability, while there was no such activity in third quarter of 2021. We recognized a gain of $10.2 million in the second quarter of 2021 on the sale of BioSeries stock. So this concludes our financial highlights for the third quarter and third quarter year to date of 2021. Thank you very much, and I'll turn the call back over to the operator for questions.